Options at Retirement

Date : 19 Sep 2017

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posted By : eff_admin

The Pensioners Are Free! The Chancellor of the Exchequer’s Budget is always guaranteed to deliver two things; groans and moans. But this year, I am surprised to announce, it generated cheers and applause. Well, from those concerned with retirement anyway (commiserations to the smokers!) Rather than paraphrase, these were Mr. Osborne’s exact words “We will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity.”[1] In other words, if you are a pensioner, you can take your entire pension in one go. George Osborne, the emancipator of the pension pot, has given you the thumbs up to do what you want with your money. Freedom is yours! Traditionally, at retirement, a pension offers 25% of the savings as a tax free lump sum, and the remainder is used to purchase an income; often through buying an annuity. Annuity rates have fallen to all-time lows and retirement income have come tumbling down with them. This has led to more and more people, who have sought advice, using a route called ‘drawdown’. This is similar to the traditional method, in that you can take your tax free lump sum, but you leave the rest of the money in a pension and draw an income from the investment. This income can be varied to give you flexibility, and if you do not spend it all, you can leave it to the kids (minus some tax of course) instead of it lining the coffers of a life insurance company! However 2014’s Budget will shake this system up. The changes proposed will massively increase the flexibility of drawdown. Now, whilst the greatest proposals are still under consultation, so we do not know all of the details, the initial suggestions indicate that you would be able to take out the rest of your pension as a lump sum instead of drawing it gradually. Great news! And I’m not trying to trick you; this genuinely is a fantastic move forwards in retirement planning. Cue celebratory dancing! But just to bring you back down to Earth, just for a second, I must warn you not to squander all of your cash the moment you retire. If you do that, you will have to rely on the state. Means tested pension benefits have been scrapped, so you will be left to rely on around £148 per week; not a particularly appealing prospect. Food for thought if you were contemplating blowing your pension pot on a new Lamborghini! Sensibility aside, this new piece of legislation truly is a wondrous thing. Osborne’s announcement is a huge benefit for retirement planning, as it gives people many more planning options, especially when it comes to tax. For example, for some it might be wise to take their money out faster than they need it. This could then be used to fund ISAs or to give to the children to avoid Inheritance Tax. There are numerous solutions for effective tax planning, so many in fact that I do not have room here to expand too far upon this subject. But it is worth bearing in mind that with the freedom to control your own pension pot, you also have the freedom to protect your wealth against tax more effectively. For example, if your estate is worth over £325,000, your loved ones will be charged a rate of 40% for the pleasure of inheriting it. That is unless you take action and put into motion some financial plans to protect your estate. With control over your own pension, you can opt to put some of your wealth into Trust for your loved ones and prevent a large Inheritance Tax bill. More on this can be found here. Please also note that taking money out of your pot may trigger a tax charge. You should check with a professional financial planner how much the tax will be before you take the money. This new legislation is not just great news for people on the cusp of retirement. Work life is changing, and more and more people want to phase in their retirement; people want to gradually reduce the work they do rather than completely stopping. With this in mind, the new pension rules will encourage people to start planning their future early; in order to facilitate their dream retirement. People are also likely to save more for their retirement if they know they have the flexibility to get their money back in the way they want it. It will also mean that advice at and in the lead up to retirement is even more important to ensure they maximise their options. So to summarise, freedom is upon us, but with freedom comes responsibility. Whilst it is not my place to tell you how to spend your hard earned cash, I would recommend some careful and strategic planning to maximise your pension pot, minimise your tax, and ensure you don’t run out of money during your lifetime. But then again, if you want to live the life of luxury aboard a lavish cruise-liner, be my guest. Retirement is about enjoying the proceeds of your success, and I am all for people ‘front loading’ their retirement by ticking off the bucket list. If you would like to talk to a professional about new pension legislation, planning your retirement or your tax strategy, our firm would be delighted to help. Call 01572 898060 or email enquiry@efficientportfolio.co.uk.